- Fed Chair Powell has said the recent FOMC rate cut was not the beginning of a cycle.
- The BOND Market does not believe that.
- Trust in the FOMC is dwindling.
An inverted yield curve tells us that the BOND Market thinks the FOMC has not cut interest rates enough, and as a result the risk of recession has increased. This is a concern because it further implies that the FOMC is not recognizing economic risks efficiently enough to act ahead of time.
Therefore, there are two concerns stemming from an inverted curve:
- It signals that a recession is coming
- It signals that the FOMC is behind the curve.
My opinion has always been that money speaks, and we should listen. This is why we use technical analysis for our trading strategies. The opinions stock market investors make with their pocketbooks can be seen clearly in the technicals, and we can use that to our advantage, and we attempt to do exactly that in our Strategies. Review the Strategies.
However, my opinion has also always been that the BOND Market is smarter than the stock market. That is, after all, where the BIG money is invested. I have found BOND Market investors do their homework much more carefully and often with longer term objectives, too.
Therefore, I place great value on the ‘pocketbook-readings’ from the BOND Market, when they come (they do not come often). I consider the investors there the smartest in the room, and when they speak with their pocketbooks we should listen. This time is no different.
While the FOMC Minutes + Powell speeches suggest the recent rate cut was a 1-time event, the Bond Market is telling us that is not going to be true.
Previously, well before the recent FOMC rate cut, I illustrated via a Special Report on Rate Cutting Cycles, that the stock market tends to fall aggressively when interest rates are being cut. For rationale, read the report please.
Possibly, the position Powell is taking could be to prevent concern related to that, but it is backfiring.
Although his comments seem to suggest this past rate cut was to balance the level of rates instead of it being a beginning of a cycle, he may also realize that a planned rate cutting regime could spark fear into the market, and he wants to avoid that. His position may actually be intended to calm concerns from smarter investors who realize market weakness goes hand and hand with rate cutting cycles.
Powell may have recently tempered his comments in such a way as to suggest the recent cut was not the beginning of a rate cutting cycle, in order to calm the fears smarter investors would have had if they knew that the FOMC saw additional concerning and compelling reasons to cut again soon.
Maybe Powell has taken the position he has to prevent concern.
Unfortunately for him, given the BOND Market reads recently and the inverted curve, the BOND Market is NOT buying it. Not only do they seem to not believe his ‘one-off-cut’ position, but they worry now that if he is serious he may not even see the bigger picture well enough to act in advance of problems.
The BOND Market believes, if the FOMC acts after the fact, the conditions could get much more serious than they would be otherwise.
In conclusion, the read from the BOND Market is that they do not believe Powell, and they are losing faith that the FOMC will act ahead of larger problems.
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